26 Comments:

Don Boudreaux, ostenibly, promotes Free Trade among individuals. Don and the Cato Institute support unilateral Free Trade for the U.S., and don't seem to care about the consequences of not trading with individuals, or rather communist state owned enterprises. Don hosts the excellent and raucous Cafe Hayek, but I don't agree with him on unilateral Free Trade.

So, I regretably I have to redo Don's quote:

To lament an American trade debtor status, is to lament the fact that mercantile communists are capital czars, in America. And that seems very odd.

"Don and the Cato Institute support unilateral Free Trade for the U.S., and don't seem to care about the consequences of not trading with individuals, or rather communist state owned enterprises."

And, what are those consequences? If I buy a cell phone battery online I don't really care where it is made or where it comes from. All I really care about is that it appears in my mailbox. Why should I care whether I'm doing business with an individual, a corporation, or a government owned enterprise? Why should I be concerned with their ideology? If anything, if my trading partner happens to be a Chinese government owned business, I would think that the Chinese people involved in this free market transaction with a capitalist, would have to question the soundness of their communist ideology.

If the money I paid is then invested in a capitalist enterprise in the US, communist ideology is again called into question.

From my viewpoint, the transaction was free trade. The view from the other end is not my concern.

I agree with Buddy. Most of the current trade deficit is being financed by foreign govt/central bank investments. It is not by individuals trying to maximize their returns.As the housing crisis shows, bad investments can have significant downside effects.If it was just foreign individuals investing in the US I would not have any problem.I seriously think we need to limit the amount of investments governments can make in this country or atleast we should not let them invest much in treasuries.

Investing in treasuries is really investing in government spending, currently only a very small portion of that goes to real investments.

"Investing in treasuries is really investing in government spending..."

The "threat" isn't that they are buying or holding our treasuries, it's that they may choose not to buy them in the future resulting in increasing interests rates as our government looks for other investors to satisfy it's out-of-control spending habit. But, as he points out in the video, who's fault is that, the party doing the investing or the party doing the spending? And doesn't the foreign purchase of treasuries free up domestic savings for more productive investment in the private sector? As Friedman pointed out, the dollars that the Chinese are hoarding must either be spent or invested in the U.S. or exchanged with another party who must spend or invest them here.

Ron and Che,The difference will be in capital allocation. If you have a different configuration of investors, you will have different price levels of different assets because preferences will be different. The same amount of dollars in circulation will yield different price levels under different economic conditions or different preferences of investors.

Prices of assets clearly affects resource allocation in the economy.

The foreign governments are probably not stupid investors but their incentives are different, it is more for currency manipulation and other political considerations.

Yes it is fault of our congress, but markets where there is discipline on both sides work better.

I agree with Buddy. Most of the current trade deficit is being financed by foreign govt/central bank investments. It is not by individuals trying to maximize their returns.

No, it's foreign governments trying to maximize their returns.

As the housing crisis shows, bad investments can have significant downside effects.

What do you care if those foreign governments are making bad investments?

If it was just foreign individuals investing in the US I would not have any problem.

So, you have no problem with individuals making "bad investments", just foreign governments.

I seriously think we need to limit the amount of investments governments can make in this country or atleast we should not let them invest much in treasuries.

Oh, yeah. That's a swell idea. Let's limit capital formation in this country. What could go wrong? And while we're at it, stop the foreigners from buying treasuries so our interest rates can skyrocket.

Investing in treasuries is really investing in government spending, currently only a very small portion of that goes to real investments.

No, investing in treasuries is purchasing the rights to your future production. It is your government, not the "Red Chinese", who are selling the promise that it will rob you at gunpoint.

Methinks,I think you are making a very wild leap of faith by claiming the Chinese and Japanese govt invest in the US to maximize returns rather than peg their currencies. It is a pretty uncommon viewpoint.I do think a system in which individuals invest their own capital for their own self interest is more superior than the one where govt bureaucrats make those decisions.

I think you are making a very wild leap of faith by claiming the Chinese and Japanese govt invest in the US to maximize returns rather than peg their currencies. It is a pretty uncommon viewpoint.

I'm not, actually. The Chinese government may consider pegging the currency a net win for it (mercantilism hurts the little people, not the kings). I'm telling you I don't care. It doesn't matter what their motivation is.

BTW...the currency market is among the most liquid markets in the world. Here's a question a trader should be able to answer - how easy is it to manipulate a super liquid market? I think their level of success is very low - though, maybe not for a lack of trying.

I do think a system in which individuals invest their own capital for their own self interest is more superior than the one where govt bureaucrats make those decisions.

Hey, man, I'm an immigrant from the USSR. You'll be hard pressed to find someone who agrees with you more.

However, in the context of trade, it doesn't matter. Your purchases are being subsidized at the expense of the Chinese. While that sucks for the Chinese, you're making out like a bandit. We have nothing to complain about. Shooting ourselves in the foot is not going to improve life for us.

"The difference will be in capital allocation. If you have a different configuration of investors, you will have different price levels of different assets because preferences will be different.The same amount of dollars in circulation will yield different price levels under different economic conditions or different preferences of investors."

Wow! Maybe it's just me, but that didn't seem very clear. Does all that merely mean that buyer preferences determine prices?

If not, perhaps you could state your meaning differently. Pretend you are explaining to a high school student. Surely then I can understand it.

Good discussion folks.This will be my last post on this topic as it does take up valuable time.

I understand the whole subsidy thing.My point is that if subsidies are large enough to cause distortion in the capital markets it does have consequences.Net Net it may still be beneficial but lets not pretend there cannot be negative consequences.From 2003 to 2007 there was big subsidy to mortgage borrowers from mortgage investors. It screwed up our economy pretty bad. That was not the kind of capital formation that was good.Lets just pretend that subsidy was coming from China, just because it came from overseas does not mean it cannot wreak havoc in the local economy.My hypothesis is that govts being active in financial markets will have a higher chance of causing bubbles and mispricing of risk and it will have consequences even if we get a subsidy. My problem with Don on this is that he pretends that there is even nothing to think or worry about on this situation at all.

"My hypothesis is that govts being active in financial markets will have a higher chance of causing bubbles and mispricing of risk and it will have consequences even if we get a subsidy."

Absolutely. I think almost everyone agrees that government interference is generally a bad thing.

"From 2003 to 2007 there was big subsidy to mortgage borrowers from mortgage investors. It screwed up our economy pretty bad. That was not the kind of capital formation that was good.Lets just pretend that subsidy was coming from China, just because it came from overseas does not mean it cannot wreak havoc in the local economy."

That's a tough one: It's pretty hard to imagine the Chinese government pressuring US lenders to make risky mortgage loans, and then buying them through a GSE to transfer risk from the original lender to US taxpayers. Other short sighted, detrimental government policies are also hard to imagine having originated in China.

What has been explained to you on this thread, and something you either don't get or refuse to acknowledge, is that the Chinese people helping US consumers pay for stuff, is good for us and bad for them.

Methinks said it best here:

"However, in the context of trade, it doesn't matter. Your purchases are being subsidized at the expense of the Chinese. While that sucks for the Chinese, you're making out like a bandit. We have nothing to complain about. Shooting ourselves in the foot is not going to improve life for us."

The "threat" isn't that they are buying or holding our treasuries, it's that they may choose not to buy them in the future resulting in increasing interests rates as our government looks for other investors to satisfy it's out-of-control spending habit.

Correct.

But, as he points out in the video, who's fault is that, the party doing the investing or the party doing the spending?

It is the fault of the party doing the spending, which is the US government and the US consumer.

And doesn't the foreign purchase of treasuries free up domestic savings for more productive investment in the private sector?

What savings? The US government, financial system leaders, and financial press encourage consumer spending, not savings. And Americans, who like the idea of a free lunch and painless sending, have paid attention and spent money they did not have.

As Friedman pointed out, the dollars that the Chinese are hoarding must either be spent or invested in the U.S. or exchanged with another party who must spend or invest them here.

Correct again. But Friedman sometimes confused money with savings. Using a dollar of savings to invest in something is totally different from creating a newly printed dollar for the purpose.